Policyholders seeking insurance funds to settle a case often face an insurer’s demand that some amount should be allocated to uncovered claims or parties. The issue arises often under directors and officers liability (D&O) policies, when settlements resolve the liability of covered directors and the uncovered company. But general liability insurers also demand to “allocate” settlements, suggesting, for example, that half of the settlement is uncovered because the complaint alleges both negligent and intentional conduct. Surprisingly, California courts have not clearly addressed the issue outside of the D&O context. How should you respond?
For D&O policies, courts first recognized the “larger settlement rule” in Harbor Ins. Co. v. Cont’l Bank Corp., 922 F.2d 357, 368 (7th Cir. 1990). The question there was how to allocate a settlement between the potential liability of the covered directors and officers, and of the uncovered company. The court held that the insurer is liable for the entire settlement, except for the amount, if any, by which the settlement was made larger because of claims against uninsured parties. In other words, if the same dollars were paid to settle the potential liability of both, those dollars must be allocated to the covered claims against the directors and officers.
The Ninth Circuit affirmed the larger settlement rule in Nordstrom, Inc. v. Chubb & Sons, Inc., 54 F.3d 1424, 1433 (9th Cir. 1995) (Washington law); and Safeway Stores, Inc. v. Nat’l Union Fire Ins. Co., 64 F.3d 1282, 1287 88 (9th Cir. 1995) (California law).